The Rise & Fall of a Billionaire Technology Hedge Fund Guru

About 15 years ago, as a young reporter covering the semiconductor industry for a newswire, I met a man called Raj Rajaratnam. At that time he was not only an influential semiconductor analyst at Needham & Co., but also president of the brokerage firm. The Sri Lanka-born analyst was one of the best and he wasn’t shy about letting people know it. Rajaratnam now runs a $7 billion hedge fund called the Galleon Technology Funds.

Earlier today, he was arrested for what is allegedly an insider trading scam involving quite a few people. The charges against him include four counts of conspiracy; he’s also being charged for eight counts of securities fraud. Talk about an ignominious fall for a man who is said to be worth a billion dollars and is ranked No. 559 on Forbes’ World’s Billionaires list.

Others charged criminally in the case include Rajiv Goel, director in strategic investments at Intel Corp.’s investment arm; Anil Kumar, a director at global management-consulting firm McKinsey & Co.; Danielle Chiesi and Mark Kurland of New Castle Partners LLC, the one-time equity hedge fund group at Bear Stearns Asset Management Inc.; and Robert Moffat, a senior vice president at International Business Machines Corp.

The allegations put Mr. Rajaratnam at the center of several insider trades in which he allegedly caused Galleon funds to act on inside information or passed along tips to others.

In one instance, prosecutors allege that Mr. Rajaratnam, between January 2006 and July 2007, received nonpublic information about Polycom Inc., Hilton Hotels Corp. and Google Inc. and caused Galleon Technology Funds to make improper trades on that information. As a result, the Galleon fund earned more than $12.7 million, prosecutors said.

When I read this news this morning on Bloomberg, my whole life flashed in front of my eyes. Rajaratnam’s rise to the top was a familiar story to anyone who was in the technology business. A graduate of the University of Pennsylvania’s Wharton School of Business, he rose to fame because of his coverage of the semiconductor industry, which at the time was on a massive upswing.

Whether it was his relationships with chip companies or something else, he became a dominant analyst for Needham and eventually brought them so much business that he became president of the firm in 1991. Remember, this was the go-go 1990s, an era when everything was OK, and he rose with the boom.

He started his own hedge fund, the Galleon Group, in 1997 and left Needham in 2001. Over the next few years, he reported spectacular returns and was the envy of the industry. Many of the analysts (such as Goldman Sachs’ Microsoft analyst Rick Sherlund) I met over my long career went to work for him. The spectacular results brought in more money. From Galleon Group web site via MarketFolly:

…..”manages a series of funds that specialize in the technology and healthcare industries. Currently The Galleon Group manages five different long/short equity funds: Technology, Healthcare, New Media (Internet), Communications and Life Sciences. Galleon’s philosophy and approach differs from that of other hedge funds in the fundamental belief that it is possible to deliver superior returns to our investors without employing leverage. Combine strong fundamental investment analysis with superior trading capability Galleon places a strong emphasis on both fundamental investment analysis and trading. This enables us to identify companies with superior long-term growth prospects while maintaining the flexibility to profit from short-term market fluctuations.”

How do I say it politely? That is all poppycock. For all that analysis was apparently nothing but smoke and mirrors, and instead seems like a case of insider information-based trading. As Bloomberg reports:

Prosecutors said they’ve been investigating the case since at least November 2007, when a person they don’t name in the complaint began meeting with agents of the Federal Bureau of Investigation. The person, who has pleaded guilty and is cooperating with authorities, had used inside information to trade securities and tipped Rajaratnam since 2006, prosecutors say in one of two complaints filed in Manhattan federal court.

The person, who had sought a job at Galleon in 2005, helped prosecutors by “making consensual recordings of four telephone conversations” with Rajaratnam, the complaint says.

Given how big this fund was, I’m sure the reverberations are going to be felt in Silicon Valley, where Rajaratnam had deep relationships. I’ve been on the phone trying to find out more from my sources and will update the report as I gather more information.

Meanwhile, it reminds me of the age-old maxim: When something is too good to be true…..